News Archives: February, 2014

ICI'​s latest "Trends in Mutual Fund Investing, January 2014" shows that money fund assets decreased by $​10.​5 billion in January, after increasing $​45.​1 billion in December and $​4.​8 billion in November. For calendar 2013, ICI shows money fund assets up by $​25.​0 billion, or 0.​9%. The Institute'​s January asset totals show a sharp drop in stock fund assets and a rebound in bond funds (​up $​28.​5 billion in January after being down $​34.​2 billion in Dec.). (​Bond fund assets declined by $​124.​4 billion in 2013.) Money fund assets rebounded in the latest week, but they'​ve fallen by $​22 billion month-​to-​date in February through 2/​26. ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which verified our reported jump in CD holdings and plunge in Treasuries. (​See Crane Data'​s February 13 News, "CD, TD Portfolio Holdings Jump, Treasury, Agencies Plunge in January.")

ICI'​s January "​Trends" says, "The combined assets of the nation'​s mutual funds decreased by $​215.​2 billion, or 1.​4 percent, to $​14.​800 trillion in January, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI..... Bond funds had an outflow of $​1.​23 billion in January, compared with an outflow of $​25.​08 billion in December." Money funds represent 18.​3% of all mutual fund assets while bond funds represent 22.​5%.

It adds, "Money market funds had an outflow of $​9.​82 billion in January, compared with an inflow of $​44.​14 billion in December. Funds offered primarily to institutions had an outflow of $​201 million. Funds offered primarily to individuals had an outflow of $​9.​62 billion." ICI'​s "Liquid Assets of Stock Mutual Funds" inched higher to 3.​6% from 3.​5% as stock funds continued to hold razor thin levels of cash.

ICI'​s Portfolio Holdings for Jan. 2014 show that Holdings of Certificates of Deposits jumped by $​48.​4 billion (​after falling $​25.​9 billion in Dec.) to $​578.​2 billion (​23.​7%), making CDs the largest of composition segments. Repos declined by $​16.​5 billion, or 3.​3%, (​after rising $​43.​0 billion in Dec. and falling $​23.​7 billion in Nov. and $​15.​1 billion in Oct.) to $​484.​6 billion (​19.​9% of assets). Repo was the second largest segment of taxable money fund portfolio holdings according to ICI'​s data series. Treasury Bills & Securities, the third largest segment, showed a decrease of $​43.​8 billion (​after an increase of $​18.​7 billion the month before) to $​452.​4 billion (​18.​5%).

Commercial Paper, which increased by $​4.​3 billion, or 1.​2%, moved up to the fourth largest segment just ahead of U.​S. Government Agency Securities. CP holdings totaled $​362.​2 billion (​14.​8% of assets) while Agencies fell by $​6.​4 billion to $​360.​7 billion (​14.​8%). Notes (​including Corporate and Bank) fell by $​264 million to $​103.​5 billion (​4.​2% of assets), and Other holdings rose by $​347 million to $​78.​4 billion (​3.​2%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 214,​083 to 23.​905 million, while the Number of Funds fell by 1 to 381. In 2013, the number of accounts fell by over 1.​1 million and the number of funds declined by 18. The Average Maturity of Portfolios lengthened by 1 day to 48 days in Jan. Over the past 12 months, WAMs of Taxable money funds remain unchanged at 48 days.

Note: Crane Data has updated its February MFI XLS to reflect the 1/​31/​14 composition data and maturity breakouts for our entire fund universe. Note again too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own this paper. (​Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access the first version of this new file.)

The Federal Deposit Insurance Corporation released its latest "Quarterly Banking Profile yesterday, which showed that "Deposit Growth Remains Strong" and that uninsured noninterest bearing transaction accounts left over from the temporary "​TAG" (​transaction account guarantee) program continue to remain, and even grow, in the largest banks. In a press release entitled, "FDIC-​Insured Institutions Earned $​40.​3 Billion in the Fourth Quarter of 2013," FDIC Chairman Martin J. Gruenberg comments, "The trend of slow but steady improvement that has been underway in the banking industry since 2009 continued to gain ground. Asset quality improved, loan balances were up, and there were fewer troubled institutions. However, challenges remain in the industry. Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability. Nonetheless, these results show a continuation of the recovery in the banking industry."

The latest Quarterly says, "Increased balances in large-​denomination accounts were responsible for much of the growth in deposits in the fourth quarter. Total deposits increased by $​163.​8 billion (​1.​5 percent), as balances in domestic offices rose by $​191.​3 billion and foreign office balances fell by $​27.​4 billion. Deposits in domestic accounts with balances greater than $​250,​000 rose by $​166 billion (​3.​5 percent). Nondeposit liabilities fell by $​55.​1 billion (​2.​9 percent), largely because of a $​42 billion (​12.​1 percent) decline in securities sold under repurchase agreements. Banks increased their advances from Federal Home Loan Banks by $​33.​1 billion (​8.​9 percent)." Total deposits were $​11.​2 trillion.

The FDIC writes, "At the end of the fourth quarter, domestic deposits funded 66.​5 percent of industry assets, the largest share since the fourth quarter of 1993, when the share was 67.​9 percent. Insured institutions held $​2.​6 trillion in domestic noninterest-​bearing deposits on December 31, 2013, 72 percent of which ($​1.​9 trillion) were noninterest-​bearing transaction accounts larger than $​250,​000. Of the $​1.​9 trillion, $​1.​7 trillion exceeded the basic coverage limit of $​250,​000 per account. The expiration of the unlimited deposit insurance coverage for noninterest-​bearing transaction accounts at the end of 2012 appeared to have little impact on industry deposit levels during 2013. The aggregate amount exceeding the $​250,​000 limit in noninterest-​bearing transaction deposits increased by 7.​9 percent ($​122.​5 billion) since the end of 2012. Table 1 shows the distribution of noninterest-​bearing transaction accounts larger than $​250,​000 by institution asset size."

A footnote explains, "The Dodd-​Frank Wall Street Reform and Consumer Protection Act (​Dodd-​Frank) enacted on July 21, 2010, provided temporary unlimited deposit insurance coverage for noninterest-​bearing transaction accounts from December 31, 2010, through December 31, 2012, regardless of the balance in the account and the ownership capacity of the funds. The unlimited coverage was available to all depositors, including consumers, businesses and government entities. The coverage was separate from, and in addition to, the insurance coverage provided for a depositor'​s other accounts held at an FDIC-​insured institutions."

The FDIC'​s update also tells us, "Total estimated insured deposits increased by 0.​7 percent during the fourth quarter. Estimated insured deposits declined by 18.​8 percent from the prior year-​end primarily due to the expiration of the temporary unlimited insurance coverage on noninterest-​bearing transaction accounts. Estimated insured deposits covered by the $​250,​000 insurance limit, however, increased by 2.​5 percent during 2013. For institutions existing at the start and the end of the fourth quarter, insured deposits increased during the quarter at 3,​500 institutions (​51 percent), decreased at 3,​289 institutions (​48 percent), and remained unchanged at 29 institutions." The FDIC'​s tables show that over 74.​0% of the $​1.​888 trillion in domestic noninterest bearing transaction accounts larger than $​250K is held in institutions with assets over $​100 billion.

Finally, it adds, "The condition of the Deposit Insurance Fund (​DIF) continues to improve. The DIF increased by $​6.​4 billion during the fourth quarter to $​47.​2 billion. The main drivers of the increase were a negative provision for insurance losses of $​4.​6 billion -- reflecting a reduction in estimated losses from failed institution assets -- and assessment income of $​2.​2 billion. Interest revenue, other miscellaneous income, and unrealized gains on available-​for-​sale securities added another $​57 million. Fourth quarter operating expenses reduced the fund balance by $​436 million. For all of 2013, 24 insured institutions with combined assets of $​6 billion failed, down from 51 failures with combined assets of $​11.​6 billion in 2012. The DIF'​s reserve ratio -- the DIF fund balance as a percent of estimated insured deposits -- was 0.​79 percent as of the fourth quarter, up from 0.​68 percent in the prior quarter and 0.​44 percent one year earlier."

Federated Investors filed its Form 10-​K Annual Report with the Securities & Exchange Commission last Friday, and the document contains a number of comments on factors impacting the money market fund business and regulatory issues. On the subject of "Historically Low Short-​Term Interest Rates," Federated writes, "​For several years, the Board of Governors of the Federal Reserve System (​the Governors) have kept the near-​zero federal funds rate unchanged and short-​term interest rates continued at all-​time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund'​s operating expenses due to these historically low short-​term interest rates. Since the fourth quarter 2008, Federated has voluntarily waived fees (​either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to non-​controlling interests as a result of Federated'​s mutual understanding and agreement with third-​party intermediaries to share the impact of the waivers."

They tell us, "These voluntary fee waivers are calculated as a percent of AUM in certain money market funds and thus will vary depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-​tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-​tax impact of fee waivers to increase."

Federated writes, "With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the distribution among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets invested in prime money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain positive or zero net yields. Conversely, the opposite would also be true."

They explain, "The negative pre-​tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in 2013 as compared to 2012 primarily as a result of lower yields on instruments held by the money market funds. During 2012, improved yields on instruments held by the money market funds caused a decline in these fee waivers as compared to 2011." (Federated showed fee waivers costing $​105.​1 million (​pre-​tax) in 2013 vs. $​71.​2 million in 2012. Revenue declined by $​389 million vs. $​291 a year earlier, but these totals were alleviated by reductions in distribution fees of $​277 million in 2013 and $​219 million in 2012. See page 6 of the annual report for more details.)

The Annual Report comments, "Federated'​s investment products are primarily distributed in four markets. These markets and the relative percentage of managed assets at December 31, 2013 attributable to such markets are as follows: wealth management and trust (​45%), broker/​dealer (​31%), institutional (​15%) and international (​6%). Wealth Management & Trust. Federated pioneered the concept of providing liquidity management to bank trust departments through money market mutual funds in 1974, and has since expanded its services nationwide to institutional cash management and treasury professionals, as well as financial professionals.... The majority of Federated'​s managed assets from the wealth management channel are invested in money market funds.... In addition to bank trust departments and registered investment advisory firms, Federated provides products and services to capital markets clients (​institutional brokerages generally within banks) and directly to cash management and treasury departments at major corporations and government entities.... As of December 31, 2013, managed assets in this market included $​147.​7 billion in money market assets, $​14.​4 billion in fixed-​income assets and $​7.​5 billion in equity assets."

It adds, "Broker/​Dealer. Federated distributes its products in this market through a large, diversified group of approximately 1,​400 national, regional and independent broker/​dealers and bank broker/​dealers.... Federated also offers money market mutual funds as cash management products designed for use by its broker/​dealer clients. As of December 31, 2013, managed assets in the broker/​dealer market included $​75.​8 billion in money market assets, $​17.​2 billion in fixed-​income assets and $​25.​4 billion in equity assets. Institutional.... As of December 31, 2013, managed assets in the institutional market included $​37.​2 billion in money market assets, $​13.​3 billion in fixed-​income assets and $​4.​3 billion in equity assets. International. Federated manages assets from clients outside the U.​S. through subsidiaries focused on gathering assets in Europe, the Middle East, and through a business initiative in the Asia-​Pacific region launched in 2012.... As of December 31, 2013, managed assets in the international market included $​11.​2 billion in money market assets, $​5.​9 billion in a liquidation portfolio, $​2.​5 billion in fixed-​income assets and $​1.​6 billion in equity assets."

Regarding "Regulatory Matters," Federated'​s report says, "In January 2010, the SEC adopted extensive amendments to Rule 2a-​7 aimed at enhancing the resiliency of money market funds. These amendments included a series of enhancements including rules that require all money market funds to meet specific portfolio liquidity standards and rules that significantly enhance the public disclosure and regulatory reporting obligations of these funds.... In Federated'​s view, the amendments of 2010 meaningfully and sufficiently strengthened money market funds. Recent experience demonstrated that the amendments of 2010 were effective in meeting heightened requests for redemptions occurring in connection with the U.​S. debt ceiling debate and subsequent downgrade of the country'​s credit rating in 2011, the European debt crisis in 2011/​2012 and its ongoing fallout as well as the U.​S. debt ceiling debate in 2013."

It continues, "Since January 2010, the SEC has been working to develop a proposal for additional reforms related to money market funds. On June 5, 2013, the SEC issued such a rule proposal for public comment. The SEC'​s proposal was lengthy (​approximately 700 pages) and included two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (​NAV) for institutional prime money market funds and other money market funds (​such as, for example, municipal money market funds) other than government and retail money market funds. The other alternative would allow a fund'​s board to use liquidity fees and redemption gates when the fund fails to maintain the prescribed liquidity threshold. In addition, in the case of either alternative, the proposal would eliminate the amortized cost method of valuation of securities maturing in more than 60 days while permitting the use of the penny rounding method to maintain a stable share price for money market funds not required to have a floating NAV. The proposal also included additional diversification and disclosure measures that would apply under either alternative."

The Report explains, "Federated supports liquidity fees and redemption gates in certain contexts. Federated believes the floating NAV, if enacted, would significantly reduce the utility and attractiveness of money market funds for investors who, in Federated'​s view, value money market funds in their current form as an efficient and effective cash management investment product offering daily liquidity at par. The elimination of the amortized cost method of valuation of securities also could impact the usefulness of money market funds as a cash management product. If ultimately enacted, the floating NAV would be detrimental to Federated'​s money market fund business and could materially and adversely affect Federated'​s business, results of operations, financial condition and/​or cash flows."

It adds, "Management does not expect final rules to be adopted prior to the second or third quarter of 2014 given, among other things, the number of industry comments and the complexity of the proposed rule amendments, as well as the SEC'​s regulatory agenda published in late 2013, which specifies an October 2014 timetable for final action on the SEC'​s proposal. Federated is unable to assess the degree of any potential impact the SEC proposed reforms may have on its business, results of operations, financial condition and/​or cash flows until any rule amendments are finalized, as the final amendments could vary significantly from the form in which proposed. Moreover, the SEC'​s proposal also contemplates that, once the final amendments become effective, there would be staggered compliance dates: (​1) if the fluctuating NAV alternative is adopted, an additional two years after the effective date for any reforms relating to that alternative; (​2) if the liquidity fee and redemption gate alternative is adopted, an additional one year after the effective date for any reforms relating to that alternative; and (​3) any reforms not specifically related to either the fluctuating NAV nor liquidity fee and redemption gate alternatives would have a compliance date of nine months after the final amendments become effective. FSOC may recommend new or heightened regulation for "​nonbank financial companies" under Section 120 of the Dodd-​Frank Act."

They also say, "In a Congressional Appropriations Committee conference report that accompanied the Consolidated Appropriations Act, 2014, which was signed into law by President Obama on January 17, 2014, Congress instructed the SEC to undertake a "​rigorous economic analysis" before promulgating its final money market fund proposal, and indicated that the "​Committee expects that the final rules will take into account the substantive concerns of stakeholders who use these products for short-​term financing needs." In the conference report, Congress also expressed that "[​i]​mpairing or restricting the use of money market funds could potentially result in a decrease in the ability of these products to provide liquidity, potentially resulting in hundreds of market participants issuing longer-​term debt, significantly increasing their funding costs, slowing expansion rates, and depressing jobs and economic growth." In addition to underscoring the importance to the capital markets of money market funds as currently structured, management believes that the conference report reflects Congress' view that the regulation of money market funds is within the purview of the SEC, not FSOC."

Finally, they add, "European-​based money market funds face regulatory reform pressure in Europe similar to that faced in the U.​S. The European Commission released its money market fund reform proposal on September 4, 2013. The proposal would permit either floating NAV money market funds or constant NAV money market funds subject to capital requirements. Under the proposal, a constant NAV money market fund generally must either build a capital buffer of 3% or convert to a floating NAV money market fund. The proposal is subject to the approval of the European Parliament and European Council and the final regulation could vary materially from that of the proposal. Management does not anticipate agreement on a final regulation before late fourth quarter 2014."

New SEC Commissioner Kara Stein talked Friday at the "​SEC Speaks" Conference and commented on short-​term funding and money markets last week in a Reuters story "​SEC'​s Stein calls for more reforms to short-​term lending market". She said Friday, "​Our lessons from the financial crisis are not exclusively addressed by the Dodd-​Frank Act. We must also think proactively of ways to mitigate threats to our financial system. During the depths of the financial crisis, the true fragility of our financial system was revealed as financial tidal waves washed over the global economy. I was working in the Senate as the crisis unfolded, and I can assure you that I will forever remember those frightening times in 2008 and 2009."

She explained, "​Our government took extraordinary measures to save the world economy, pouring trillions of dollars into the markets and financial firms.... As financial institutions struggled for funding amidst the sharp pullback of the short term lending markets, the Federal Reserve eased the rules, and expanded the ability of firms to tap the discount window. It created several unprecedented programs out of thin air with technical-​sounding names, such as the Term Auction Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility."

Stein continued, "To help provide liquidity directly to borrowers and investors in key credit markets, the Federal Reserve also created the Commercial Paper Funding Facility, the Asset-​Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, and the Term Asset-​Backed Securities Loan Facility. Some of these programs worked, and others didn'​t. But collectively, these and other efforts helped stem the tide of the credit crisis. I also note that most of these markets, and those who participate in them, are regulated by the Commission."

She told the audience, "Now, several years removed, some seem determined to forget what happened, arguing that we should ignore the inter-​relationships that nearly caused global economic collapse. I cannot forget. I will not ignore the relationships between banks, broker-​dealers, funds, and investors. Nor will I forget how those relationships nearly unwound our financial system."

Stein explained, "For example, the short term funding market is a complex ecosystem in which investors, including money market funds, interact with broker-​dealers, banks, and non-​bank issuers. Behavior by one sector in the market will have repercussions for the rest. For example, if the demand provided by money market funds for short term paper dries up, even if there isn'​t a so-​called "​run," what happens? Similarly, if lenders refuse to accept even high-​quality, stable-​value collateral, to support their short term loans, what happens? We learned that supposedly well-​capitalized firms could quickly fall victim to liquidity crises. And we learned that highly leveraged, affiliated broker-​dealers can threaten even some of the largest banks."

She added, "​Since the crisis, regulators around the world have been working to improve capital, leverage, liquidity, and margin rules. There is a reason why Congress and regulators have been working to tighten the definition of what constitutes "​capital" in the years since the crisis. There is a reason why our fellow regulators care deeply about the risks posed by securities lending and the tri-​party repo markets. And there is a reason why the Financial Stability Oversight Council (​FSOC) has been working with the Commission to address risks posed by money market funds. Our government put trillions of dollars on the line to bail out, directly and indirectly, our entire financial system, and each of these areas played a key role in the crisis."

Finally, Stein commented, "We, at the Commission, are working on rules to prevent runs on money market funds. Those are valuable efforts, but they do not go far enough to address systemic risks. Our regulations shape the role that money market funds play in providing short-​term funding for issuers, particularly the largest financial firms. We must consider whether regulations need to be updated. We should consider whether enhanced capital, leverage, liquidity, and margin rules would help mitigate risks at the firms, and in the markets, we regulate."

Last week'​s Reuters article (​from The Chicago Tribune) tells us, "The short-​term lending market is in need of reform to improve its transparency, a top U.​S. regulator said on Wednesday, saying that the lack of public information on how much financial firms rely on such borrowing could lead to another financial crisis." Stein told Reuters, "We should be doing more to improve large financial firms' disclosures about how reliant they are on short-​term funding, and how susceptible they may be to liquidity crises. Improving disclosures about short-​term funding will empower the markets to help prevent the next liquidity crisis."

Reuters added, "Stein did not describe how a final money market fund rule should be drafted. However, she said the rule targeting fund run risk is "​just one part of the short-​term lending market" and should not be all that regulators do in this space. She urged the SEC to work more closely with other regulators on the issue."

Stein said to Reuters, "​We need to be thinking about other parts of this market that should be reformed to prevent another financial crisis. The SEC oversees the broker-​dealers who are integral to securities lending and the corporate issuers doing the borrowing, so we need to be working with our fellow regulators to address the risks of short-​term funding."

The Federal Reserve released the minutes from 2008 during the height of the Subprime Liquidity Crisis Friday, which showed that the Board had little appreciation for the damage that the bankruptcy of Lehman Brothers was about to inflict upon markets and upon the world economy. (​They erroneously thought AIG was larger risk to money funds than Lehman.) The Fed'​s "Meeting of the Federal Open Market Committee on September 16, 2008" quotes Bill Dudley, "Now, the Lehman filing has also intensified the pressure on Morgan Stanley and Goldman Sachs in a number of respects. The Lehman failure means that investors now view the debt of Morgan Stanley and Goldman Sachs as having much more risk than it did on Sunday. This means that these firms need bigger liquidity buffers than they had before.... Morgan Stanley experienced a modest, but not insignificant, pulling back of their counterparties and ate into their liquidity buffer by a measurable degree." (Note: Lehman Brothers had declared bankruptcy the night before, Sunday night, and Reserve Primary Fund would "​break the buck" the following day, triggering a run on Prime Institutional money funds and a freeze in major portions of the money markets. See our "​News" archives from Sept. 2008 for more.)

They continue, "The Lehman problems also were evident in some other areas. This is very incomplete, but the ones that came to my attention were money market funds -- especially, the Reserve Fund that had large withdrawals, and they encountered a significant liquidity problem. I am actually not sure how that was resolved, but I think that State Street was in the situation of having to cover a very large shortfall of the Reserve Fund last night. The risk here, of course, is that, if AIG were to fail, money funds have even a broader exposure to them than to Lehman [​sic], and so breaking the buck on the money market funds is a real risk. The capital resources of the entities that are associated with the money market funds often are quite modest, so their ability to top up the money funds and keep them whole is quite limited. Thus the money market funds are definitely one important issue in how this contagion could be broader."

The Fed'​s Dudley continues, "​Of course, we also have the issue of AIG. The AIG problem is at least starting as a liquidity crisis. The problem with AIG is that the parent company doesn'​t have a lot of liquidity resources and doesn'​t have easy ability to funnel liquidity up from their subsidiaries because most of the subsidiaries are regulated entities. So AIG is running into two problems: One, they are unable to roll their commercial paper and, two, as their ratings are downgraded -- they were downgraded by Moody'​s yesterday, I think from AA minus to A minus, but don'​t quote me on that -- they have to post a lot more collateral against their derivatives exposures and also with respect to their GIC (​guaranteed investment contract) business. So AIG is in a situation in which the parent is basically going to run out of money -- today, tomorrow, Thursday, or very, very soon. Now we say it'​s a liquidity thing, but a lot of times when people look closer at the books they find out that the liquidity crisis may also be a solvency issue. I think it is still a little unclear whether AIG'​s problems are confined just to liquidity. It also may be an issue of how much this company is really worth."

He tells the meeting, "Finally, let me talk a bit about the facilities that we introduced over the weekend. Basically, we did two things. We broadened the Primary Dealer Credit Facility (​PDCF) significantly in terms of collateral eligibility. Whereas, before, the PDCF took investment-​grade securities only, we broadened it to include basically everything that is in the tri-​party repo system. We felt that, by backstopping the tri-​party repo system completely, we would reassure tri-​party investors that they didn'​t face rollover risk, and so we would keep tri-​party investors investing with the banks. That seems to be mostly what happened, at least yesterday. We did get quite a bit of PDCF borrowing yesterday evening, but it was predominantly Lehman. It was about $​28 billion of Lehman borrowing. I think the total borrowing was something on the order of $​42 billion."

Dudley adds, "That is telling you that most of the borrowing we had was associated with Lehman'​s not being able to roll over their tri-​party repo positions with their investors. We don'​t really know the reasons for the other borrowing, but it probably was mostly to test the facility as opposed to actual need. So broadening the PDCF collateral eligibility does seem to be working, so far at least, in keeping tri-​party investors in the game and continuing to provide funds to the other primary dealers."

Later, the Boston Fed'​s Eric Rosengren comments, "​Just an amplification on the State Street situation. My understanding is that no money actually went out. There was $​20 billion in withdrawals that came in late in the day. They had a $​7.​5 billion credit line. State Street had enough collateral to do $​7.​5 billion. They were unwilling to do $​20 billion. They asked us what our position was, and we told them that they needed to make their own business decision in this case. I haven'​t heard what has happened this morning. I assume that they are scrambling for funds. But I would emphasize that a real concern is that there will be a run this week on money market funds because they may have to freeze the funds. It is possible that they will break the buck, and this will be at organizations that don'​t have sufficient capital to make people whole. So I think that is a real concern."

The Richmond Fed'​s Jeffrey Lacker adds, "I know there was a lot of concern going in yesterday about the tri-​party repo market, and I envisioned two scenarios and anything in between them. One is tri-​party lenders pulling away from particular names and moving their funds to other names. Another, at the other extreme, would be tri-​party repo lenders pulling away from the market as a whole. If you look at the tri-​party repo market from the point of view of the borrowers, that is a frightening scenario. Then the lenders are going to do something with that money. I have been curious about what they would do. My understanding is that cash balances, in essentially deposit accounts, piled up at State Street and BONY yesterday and that they were able to do tri-​party repos with some institutions that had been pulled away from. Is that a valid observation? What are the prospects for that providing some kind of resilience for the tri-​party market?"

Dudley answers, "Well, I guess the first thing I would say is that you are absolutely right. If investors pull away, they have to take their money somewhere. It doesn'​t disappear. I think that the Primary Dealer Credit Facility has been shown to be pretty significant in providing support to this market. If you look at what happened to Lehman, for example, even though Lehman was under extreme pressure on Friday, the tri-​party repo investors stayed with Lehman on Friday night, which actually surprised me. I think the reason that they stayed is that they knew they didn'​t really have a lot of rollover risk. As long as the broker-​dealer didn'​t file for bankruptcy over the weekend -- and that was the risk they really were taking -- the Federal Reserve and the PDCF would be there as the tri-​party repo investor of last resort."

He says, "Lehman'​s experience suggests to me that, if we can contain the broad parameters of this crisis so that it doesn'​t spread much further, then we can keep the tri-​party repo investors from bolting because they don'​t really have a huge amount of risk as long as we are there behind them to take them out when their overnight obligation comes due the next day."

Lacker asks, "So, if I can just follow up, my understanding is that tri-​party repos are exempt from the automatic stay, so it is not filing per se that is the risk. It'​s the risk that they don'​t have the cash, right?" Dudley answers, "​Well, I'​m not sure about that. I thought that there was an issue about broker-​dealer filing. I know that the clearing banks are certainly quite nervous about that eventuality, but I'​m not a lawyer." Finally, a Mr. Parkinson comments, "The repos are exempt from the automatic stay provisions of the bankruptcy code. But if Lehman had gone into SIPA liquidation, they could have been subject to a SIPA stay."

Money market mutual fund assets dropped sharply on Tuesday and in the latest week, according to Crane Data'​s Money Fund Intelligence Daily and ICI'​s weekly Money Market Mutual Fund Assets. ICI'​s latest statistics show that assets dropped by almost $​50 billion the past week, while our MFI Daily shows a drop of $​51.​9 billion, with over half of the drop occurring on Tuesday (​down $​28.​8 billion). MFI Daily showed assets falling by $​15.​9 billion on Friday and $​8.​8 billion on Wednesday too. Money fund assets normally drop on the 15th of each month due to payroll and various tax payments, and they also decline on long weekends and Treasury auction dates; all of these were present the past week. The decline was the biggest since the week ended Oct. 16, 2013 (​also a long weekend that included the 15th of the month).

ICI'​s "Holdings by Region of Issuer summary explains, "Prime money market funds' holdings attributable to the Americas declined from 48.​21 percent in December to 42.​22 percent in January, primarily reflecting a decrease in repurchase agreements with the Federal Reserve. Government money market funds' holdings attributable to the Americas declined from 89.​58 percent in December to 84.​58 percent in January, which also primarily reflects a decrease in repurchase agreements with the Federal Reserve." (​ICI doesn'​t publish individual fund holdings.)

Their "​Prime and Government Money Market Funds' Holdings, by Region of Issuer table shows Prime Money Market Funds with 42.​2% in the Americas (​vs. 48.​2% last month), 19.​4% in Asia Pacific (​vs. 20.​1%), 38.​2% in Europe (​vs. 31.​5%), and 0.​2% in Other and Supranational (​vs. 0.​3%). Government Money Market Funds held 84.​6% in the Americas (​vs. 89.​6% last month), 0.​6% in Asia Pacific (​vs. 0.​5%), 14.​7% in Europe (​vs. 9.​9%), and 0.​1% in Supranational (​vs. 0.​1%).

The "Weighted Average Maturities (​WAMs) and Weighted Average Lives (​WALs) section tells us, "Prime funds had a weighted-​average maturity of 47 days and a weighted-​average life of 83 days, as of January. Average WAMs and WALs are asset-​weighted. Government money market funds had a weighted-​average maturity of 48 days and a weighted-​average life of 66 days, as of January." The table, "Prime and Government Money Market Funds' WAMs and WALs shows Prime MMFs WAMs and WALs remaining unchanged from last month (​at 47 and 83 days, respectively) and Government MMFs' WAMs remaining unchanged at 48 days and their WALs increasing by one day from 65 days.

The release adds, "Each month, ICI reports numbers based on the Securities and Exchange Commission'​s Form N-​MFP data, which many fund sponsors provide directly to the Institute. ICI'​s data report for January covers funds holding 94 percent of taxable money market fund assets."

ICI'​s commentary accompanying the release explains, "As discussed last month, government money market funds hold very high levels of weekly liquidity -- more than 84 percent of their portfolios on average -- because most of their holdings are made up of Treasury debt, short-​dated agency debt, or repurchase agreements. Prime money market funds also have weekly liquidity ratios that, at nearly 37 percent, are above the minimum SEC requirements. Funds' liquidity ratios typically vary little from month to month, even during periods of substantial inflows or outflows. For example, the current data release shows that the average liquidity ratio of prime money market funds rose only slightly, to 36.​73 percent in January from 36.​36 percent in December."

Finally, ICI'​s Plantier adds, "Liquidity ratios also tend to move little from month to month over longer stretches, despite significant market events. For example, the figure above -- which shows weekly liquidity for government and prime money market funds from January 2011 to January 2014 -- indicates that funds maintained stable liquidity ratios in 2011, even in the face of significant uncertainty emanating from the eurozone debt crisis and the political impasse involving the U.​S. federal debt ceiling."

Below, we excerpt from Part II of our latest monthly profile, "Capital Advisors Group'​s Campbell, Pan Talk SMAs," from our flagship Money Fund Intelligence newsletter. MFI: Do you oversee more money funds or separate accounts?Campbell: We are not a money fund manager. We use money funds as liquidity vehicles for our separate accounts. MFI: Do separate accounts look like money funds?Campbell: Our separate accounts tend to be longer in duration than money funds. We purposely try to be longer than money funds in order to take advantage of additional supply and yield further out on the curve.

Pan: Money funds tend to run a barbell because of WAM restrictions. They have to maintain liquidity on the front end and often seek yield on the back end. We tend to use more of a ladder in our portfolios because we seek to provide liquidity to clients when their liabilities come due.

MFI: Have fee waivers impacting you? Campbell: Because many of our portfolios are longer than money funds, I don'​t believe that we'​ve been as impacted by fee waivers as money funds have been. But we have felt the impact.

MFI: Can you tell us about your SEC comment letter? Pan: [​The SEC] is trying to address the liability side of the business in order to prevent runs. That'​s where we came in and said, '​What if you have a dual NAV approach,' meaning that the NAV for the underlying securities is fully transparent, an unrounded NAV ... to the fourth decimal place. On a daily basis, investors would be able to see the true NAV, [​but] for transaction purposes [​the NAV would be rounded to 2 decimal places]. We'​ve done tests and believe the NAV is very unlikely to break the buck when rounded to 2 decimal places. At the same time, we think that the unrounded NAV would provide more transparency to the market and reduce the propensity for runs, as investors would be prepared if funds move closer to 99.​5 or 100.​5.... We believe that our proposal would maintain the current utility of money market funds, while addressing the SEC'​s concern about runs.

MFI: Do you have standard portfolios for your SMAs? Campbell: All SMA'​s are customized, but we do have some general categories. For example, we have a "​core plus" product that seeks additional return potential in exchange for potentially increased exposure to headline risk SMA'​s are customized according to liquidity needs and investment objectives of each client, and we vary our asset class, credit and duration selection accordingly. We also manage offshore money as many of our clients have overseas operations that conduct business in euros, pounds, etc.

MFI: What is your outlook for 2014? Campbell: I think it'​s a transition year for the industry.... We will have regulatory reform, which will be handed down in one form or another in 2014. We think there has certainly been improvement in the fundamental economic backdrop [​and] think we are closer to the point where there is going to be a shift in Fed policy. I think that'​s going to translate into a steepening of the yield curve and some potential yield opportunities after enduring 4-​5 years of ultra-​low rates. We view 2014 as a year in which investors will have to begin to reevaluate their investment product selections.

MFI: Can you comment on the overall levels of corporate cash? Campbell: I think that one of the issues relating to levels of corporate cash is where the corporate cash resides. There is far too much cash captive overseas. As long as there are differences in the tax codes between domestic and overseas cash, there is no incentive to put that money back to work domestically. I think it would be healthy for both the economy and the industry to have some of that cash repatriated. Pan: I think that there'​s another aspect besides trapped cash. With shifting financial regulations, bank credit quality [​issues] and counterparty risks, I believe that more and more large corporations are of the opinion that they should self-​fund, rather than rely on the markets and banks for cash.

MFI: How long has Capital Advisors been running cash?Campbell: We started in 1991 as an "​outsourced" investment management solution for treasurers. Our focus was then and is now managing separate accounts for institutional cash investors. As we'​ve gone through different credit and investment cycles, we'​ve seen the need for and developed credit and risk management products in response to inquiries from treasurers. We began by providing credit analysis of securities and portfolios, which although separate from our invest management business, drew upon our strong research and portfolio management capabilities.

That evolved into the surveillance and management of money market fund risk through our FundIQ product. We'​re now beginning to help organizations evaluate their overall counterparty risk exposure by examining the risk associated with money market funds, individual securities, deposits and other counterparty exposures. I'​ve been on the investment side for 30 plus years. I started my career at Fidelity Investments where I was more of a generalist and then I moved on to The Boston Company, where I started to focus on the money markets arena, before founding Capital Advisors Group. Pan: I started with BofA'​s [​former] Fleet Investment Advisors, which was named Columbia Management Group. I was there for seven years working on fixed income products up and down the curve. I started with Capital Advisors Group in 2003.

MFI: When have been your big growth periods?Campbell: Crises have helped because we'​ve always been credit centric and very [​focused on] risk management. The core of our business is running separate accounts and providing money market fund research. We'​ve had significant asset growth in times of strong funding environments when it'​s been relatively easy for corporations to grow their balance sheets.

MFI: What have you been working on lately?Campbell: Our FundIQ research began in 2009. It was an extension of our internal credit and review process for our own money fund positions in separately managed accounts. We developed the product in response to inquiries from a number of large institutions for assistance in understanding and managing the risk associated with their large money market fund positions. The functionality of the FundIQ product has grown since then and we are constantly working to further enhance the product. For example, as the finance sector has gone through a series of downgrades we have responded to the market'​s needs by capturing and analyzing more aspects of risk within money market funds. We'​re also in the process of developing a product that helps to capture, analyze and manage organizations' overall counterparty risk.

MFI: What does FundIQ focus on?Pan: FundIQ research is a credit tool for large institutional investors that want to have a deeper understanding of their money market fund investments. In addition to looking at underlying securities, it evaluates characteristics of money funds such as sponsor quality and management capabilities. At the end of the day, we want to ascertain the likelihood of the fund being able to provide liquidity to our clientele in times of stress.

MFI: What'​s your biggest challenge?Pan: Low yields and lack of supply remain the major challenges for both money market funds and separately managed accounts. Historically, our main challenge has been educating our clients about various asset classes and credits. For example, we believe that certain types of asset-​backed securities have a place in a portfolio, but investors need to understand and feel comfortable with the risks and characteristics of the asset class.

MFI: What are you buying now?Campbell: We have a fairly decent range of strategies that we run for separate accounts; the strategy for each account is mapped to the risk tolerances and needs of each client. We typically invest in a wide range of short-​term investments such as commercial paper, corporate bonds, government securities, asset-​backed securities and certain sovereign credits. Pan: Our separately managed accounts can be a nice compliment to money funds. Our sweet spot is the 90-​day to the 2-​year part of the curve.

MFI: What are customers asking about?Campbell: A number of customers are striving to understand what their exposures are in both investment vehicles and elsewhere throughout their organizations. Pan: Another question [​we get] is, 'What is going to happen to money market funds if the NAV were to float?' Campbell: We always have had a broader view of investment solutions. Certainly, we bring specific solutions with respect to separate accounts and risk management for money funds. But we also try to act as an extension of our clients' internal treasury efforts, addressing issues such as risk management and credit management.

The Statement adds, "​As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

The NY Fed also released an "Update on Tri-​Party Repo Infrastructure Reform" late last week. This comment says, "Two years ago, the Tri-​party Repo Infrastructure Reform Task Force released its final report, including a seven-​point roadmap to guide the work still needed to (​1) achieve a substantial reduction in the usage of discretionary intraday credit extended by the tri-​party clearing banks, and (​2) foster improvements in market participants' liquidity and credit risk management practices. At that time, the Federal Reserve announced its intention to embrace this roadmap and to use its supervisory tools to encourage its implementation by market participants. Shortly thereafter, both clearing banks -- Bank of New York Mellon and J.​P. Morgan Chase -- announced that they were committed to completing the infrastructure work needed to achieve a settlement regime that was much less dependent on their provision of intraday credit, and would deliver improvements by the end of 2014."

The update continues, "​As 2014 begins, progress in achieving industry reform objectives is evident. Both clearing banks have already done much to re-​engineer their tri-​party repo settlement systems in ways that significantly reduce the amount of intraday credit needed for daily settlement, including ending the daily unwind of cash and collateral for non-​maturing trades and redesigning the process for settling maturing trades in a more liquidity-​efficient manner, thereby requiring less clearing bank credit. Market participants have also made important changes in their practices and behaviors that have helped to reduce the demand for intraday credit. Repo buyers and sellers are confirming the majority of their trades earlier in the day, providing the clearing banks with better and timelier information, which helps them to run settlement in a more credit-​efficient manner. Progress has been made by some dealers in extending the tenor and laddering the maturity of their repo books, particularly for less liquid securities, so that maturities are less concentrated on any given day than they were in the past, reducing their need for credit. The Federal Reserve will continue to collaborate with other supervisors and regulators in encouraging dealers to employ robust liquidity management practices that would facilitate an orderly wind-​down of their less liquid securities portfolios in the event that secured funding of these assets is withdrawn."

The NY Fed comment continues, "Collectively, these changes in process and practice have already resulted in a sharp reduction in intraday credit usage, from 100 percent of daily volume in late 2012, to about 20 percent of daily volume today. In dollar terms, the two clearing banks are providing over a trillion dollars less in intraday credit to market participants on a daily basis today than in February 2012. By the end of 2014, the Federal Reserve Bank of New York expects that intraday credit usage will reach, and may even fall below, the Task Force'​s benchmark of 10 percent of daily tri-​party repo volume."

They write, "Additional work is still needed, however, to fully realize the objective of a safer tri-​party repo settlement process that is more resilient to stress. By the end of this quarter, both clearing banks will have put in place a more automated, centralized and streamlined process for collateral optimization and allocation that will speed these processes and facilitate their interaction with the new settlement infrastructure that has been developed.... Dealers, tri-​party repo cash investors and their custodial agent banks will need to adapt their practices to the new settlement regime in order to fully realize its promise. In particular, it will be critical for tri-​party repo investors to fund their new trades, and dealers to fund their maturing trades, before end-​of-​day settlement activity is initiated at 3:​30 p.​m. ET. Substantial process changes, such as changes to cash netting arrangements, may be required to support the necessary changes in behavior."

The NY Fed adds, "A third policy imperative that the Federal Reserve has long highlighted -- namely the risk of destabilizing fire sales of repo collateral by tri-​party repo investors in the event of a default of a large tri-​party repo borrower -- is not currently being addressed by industry participants. The risk of post-​default fire sales is not unique to tri-​party repo, but is a particular concern in the tri-​party repo market given the composition of its investor base. Many tri-​party repo investors are highly vulnerable to liquidity pressures and credit losses that may cause them to liquidate the collateral of a defaulted counterparty very quickly, even if they must do so at a loss. The ensuing price declines could trigger margin calls and deleveraging well beyond the repo market, spreading instability across the financial system. Unfortunately, no mechanism currently exists or is being developed to ensure that investors will act collectively and in a measured way in liquidating their collateral. Fire sale risk remains a critical policy concern of the Federal Reserve and other members of the U.​S. regulatory community."

Finally, the update adds, "Tri-​party repo market participants have made good progress to date in reducing reliance on intraday credit as a source of systemic risk in this market. But more work clearly remains to be done to make this important wholesale funding market more resilient to stress so that the events of 2008 are not repeated. In particular, market participants, together with regulators and supervisors, must work to complete the integration of GCF Repo into the new tri-​party repo platform, and to develop new ideas and approaches for mitigating the risk that fire sales of assets could occur in the aftermath of a tri-​party repo borrower'​s default."

Bloomberg writes "Money-​Market Funds May Win EU Reprieve as Lawmakers Seek Deal," which discusses the European Union'​s tentative proposal to regulate money market funds by implementing a 3% capital buffer, and the possibility it may fail or get diluted in next Monday'​s vote. It says, "Money-​market funds may get an extra two years to build up cash buffers intended to ward off crises, as European Parliament legislators seek to resolve a clash over draft rules that the industry has warned would harm lending."

Bloomberg says, "Said El Khadraoui, the lawmaker leading work on the measures, said he'​s weighing options including giving funds an extra two years to meet the buffer requirement in a bid to clinch a deal at a vote on Feb. 17. There is "​fierce opposition" to the buffers from some members of the assembly'​s Economic and Monetary Affairs Committee, El Khadraoui said by telephone." They quote him, "It'​s unclear whether a buffer could be accepted by the committee in its vote on Monday."

The article explains, "Next week'​s Brussels vote will indicate parliament'​s negotiating position on the plans ahead of talks with national governments on the final version of the law. El Khadraoui said he may also seek to insert a review clause to examine how well the measures work in practice. Michel Barnier, the EU'​s financial services chief, put forward the draft law in September in an attempt to boost funds' resilience to crises. Barnier'​s proposals would require funds that maintain a fixed share price, known as constant net-​asset value, or CNAV, funds, to build up a cash buffer equivalent to 3 percent of their assets."

Bloomberg adds, "​Funds that are already in place before the rules become law would have three years to fully meet the requirement. This would be extended to five years in El Khadraoui'​s plan. Some members of the parliament committee back calls from the European Systemic Risk Board, a group of EU authorities including the European Central Bank and Bank of England, for an outright ban on CNAV funds. Others are opposed, warning that scrapping the funds would lead to increased funding costs for businesses and governments, and boost the economy'​s reliance on bank lending."

Finally, the piece says, "While legislators are split over the need to introduce buffers "​everybody agrees at least there should be a gating mechanism" that would protect CNAV funds from runs by limiting how fast investors could withdraw their cash in a crisis, he said. It is "​very unlikely" that a deal on the legislation can be reached with governments before EU parliament elections scheduled for May, meaning work on the measures will extend into late 2014, El Khadraoui said."

In other news, J.​P. Morgan Securities published its latest "​Prime money market fund holdings update". Authors Alex Roever, Teresa Ho, and Chong Sin write, "After a sharp decline in bank holdings at year-​end, bank holdings bounced back strongly in January as banks and dealers made more supply available to liquidity investors. MMF participation in the inaugural 2y Treasury FRN was light as the auction spread was too rich for much of the MMF community. Allocations to the Fed overnight reverse repo (​O/​N RRP) remained elevated through January as the decline in T-​bill supply forced funds to search for substitutes." (​See yesterday'​s "News" for our review of the latest Money Fund Portfolio Holdings too.)

They add, "MMFs took down about $​1.​7bn of the inaugural $​15bn 2y Treasury FRN auction which represents about 11% of the total offering amount. Prime MMFs were the largest buyers, taking down $​885mn of the auction. Treasury MMFs took down $​668mn and government/​agency MMFs bought $​131mn. Although Treasury MMFs were the second largest participants of the auction, as a percentage of total assets, Treasury MMFs committed more assets to the FRNs at 1.​14% versus prime MMFs which committed just 0.​70%. The average size of Treasury FRN holdings across the funds was $​80.​2mn and the average size of the funds was $​9.​56bn. The largest buyer was a $​79.​5bn prime MMF which bought $​474.​5mn of the auction. The smallest buyer was an $​87mn government/​agency MMF that bought only $​800k."

Finally, JPM writes, "Prime MMFs total bank holdings increased by $​65bn in January, driven mostly by increases in European bank CDs and time deposits. French and German bank holdings increased by $​25bn and $​11bn, respectively mostly via CDs and repo while increases in time deposits holdings with non-​Eurozone European banks drove increased exposures to those regions. Non-​Eurozone Yankee bank holdings experienced broad declines while US bank holdings declined by $​11bn, reflecting the reversal of the one-​off increase in repo supply provided by one US bank at year-​end."

Crane Data released its February Money Fund Portfolio Holdings data yesterday, and our latest collection of taxable money market securities, with data as of Jan. 31, 2014, shows a jump in CDs (​certificates of deposit), Time Deposits and Commercial Paper and a sharp drop in Treasuries, Government agency securities and repo. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) decreased by $​258 million in January to $​2.​507 trillion. (​Assets would have dropped by over $​8 billion, but we added several funds, including PFM Prime and Govt, and Alliance Bernstein Exchange Reserves.) Portfolio assets increased by $​55 billion in December, decreased by $​10.​7 billion in November and by $​9.​4 billion in October. CDs remained the largest holding among taxable money funds, followed by Repo, Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-​affiliated holdings rebounded after plummeting in December on the Repo shift into the Fed from dealer balance sheets; European holdings are now 29.​6% of holdings (​up from 23.​3% last month). Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (​CD) jumped sharply, increasing $​45.​9 billion to $​581.​3 billion, or 23.​2% of holdings. Repurchase agreement (​repo) holdings declined by $​14.​2 billion to $​487.​7 billion, or 19.​5% of fund assets. (​Repo at the NY Fed plunged from $​139.​2 billion but remained a huge $​79.​8 billion.) Treasury holdings, the third largest segment, plummeted $​53.​8 billion to $​451.​3 billion (​18.​0% of holdings). Government Agency Debt fell by $​24.​7 billion. Agencies now total $​366.​6 billion (​14.​6% of assets). Commercial Paper (​CP), the fifth largest segment, increased by $​16.​3 billion to $​398.​0 billion (​15.​9% of holdings). Other holdings, which includes Time Deposits, jumped $​34.​0 billion to $​182.​3 billion (​7.​3% of assets). VRDNs held by taxable funds dropped by $​3.​8 billion to $​39.​6 billion (​1.​6% of assets). (​Crane Data'​s Tax Exempt fund data will be released in a separate series Friday and our "​offshore" holdings will be released Saturday.)

Among Prime money funds, CDs still represent over one-​third of holdings with 36.​4% (​up from 34.​1% of a month ago), followed by Commercial Paper (​24.​9%, up from 24.​3%). The CP totals are primarily Financial Company CP (​15.​1% of holdings) with Asset-​Backed CP making up 5.​8% and Other CP (​non-​financial) making up 4.​1%. Prime funds also hold 6.​5% in Agencies (​down from 7.​8%), 5.​6% in Treasury Debt (​down from 6.​0%), 2.​7% in Other Instruments, and 5.​5% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​597 trillion (​up from $​1.​570T), or 63.​7% (​up from 62.​6%) of taxable money fund holdings' total of $​2.​507 trillion. Government fund portfolio assets totaled $​451.​2 billion, down from $​453.​8 billion last month, while Treasury money fund assets totaled $​459.​9 billion, down sharply from the $​483.​4 billion in December.

European-​affiliated holdings rebounded sharply, up $​158.​3 billion in January to $​741.​8 billion (​among all taxable funds and including repos); their share of holdings jumped back to 29.​6%. Eurozone-​affiliated holdings also jumped (​up $​100.​8 billion) to $​437.​5 billion in Jan.; they now account for 17.​5% of overall taxable money fund holdings. Asia & Pacific related holdings fell by $​3.​3 billion to $​310.​7 billion (​12.​4% of the total), while Americas related holdings plummeted $​155.​6 billion to $​1.​453 trillion (​58.​0% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (​up $​3.​8 billion to $​196.​4 billion, or 7.​8% of total holdings), Treasury Repurchase Agreements (down $​16.​6 billion to $​214.​6 billion, or 8.​6% of assets and Other Repurchase Agreements (​down $​1.​3 billion to $​76.​7 billion, or 3.​1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $​18.​3 billion to $​240.​3 billion, or 9.​6% of assets), Asset Backed Commercial Paper (​down $​4.​4 billion to $​92.​9 billion, or 3.​7%), and Other Commercial Paper (​up $​2.​4 billion to $​64.​8 billion, or 2.​6%).

The United States remained the largest segment of country-​affiliations though holdings dropped sharply; it now represents 49.​5% of holdings, or $​1.​240 trillion. France (​9.​5%, $​239.​2B jumped back into second place ahead of Canada (​8.​5%, $​211.​8B) and Japan (​7.​7%, $​194.​1B). The UK (​4.​5%, $​113.​4B) jumped back into to fifth place, and Germany (​4.​3%, $​107.​3B) moved back into sixth. Sweden (​4.​0%, $​99.​0B) dropped to seventh, Australia (​3.​7%, $​92.​2B) fell to 8th, the Netherlands (​3.​1%, $​77.​6B) was ninth, and Switzerland (​2.​4%, $​60.​7B) was tenth among country affiliations. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.)

As of Jan. 31, 2014, Taxable money funds held 22.​3% of their assets in securities maturing Overnight, and another 13.​5% maturing in 2-​7 days (​35.​8% total in 1-​7 days). Another 20.​8% matures in 8-​30 days, while 25.​7% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 13.​8% of taxable securities, and just 4.​0% matures beyond 180 days.

Citi'​s latest "​Short Duration Strategy" features a brief entitled, "Will collateralized CP (​CCP) be a source of growth for the CP market? Author Vikram Rai explains, "​Traditional CP programs are promissory notes issued by financial institutions, corporations, asset backed issuers, and sovereigns for short-​term financing needs. The new CCP programs that have recently come to market are typically CP programs issued by banks with term repurchase agreements (​repos) as underlying asset collateral. In light of the lack of growth in the CP market (​the ABCP market in particular, continues to decline) money market investors are hopeful that CCP will
become a new source of issuance volume." (​Note: Look for Crane Data'​s Money Fund Portfolio Holdings with data as of Jan. 31, 2014, to be released later this morning.)

He writes, "There are some structural similarities between CCP and repo-​backed ABCP (​which is a much older product with some conduits dating back to the late 1990s) since both use repo assets as collateral and utilize an issuer/​co-​issuer structure. However, there are some fundamental differences as well and we highlight some below. Back-​up liquidity facility: ABCP conduits are backed by liquidity agreements and these are usually provided by the sponsoring bank. In case of CCP, investors have access to repo collateral in the event that the bank does not meet its obligations under the program."

Citi'​s piece continues, "​Obligations of the sponsor of the vehicle and not anonymous borrowers: CCP has a functional similarity with unsecured CP in the sense that while CCP investors can claim repo collateral if there is any delay or default in payments, it is primarily the obligation of the issuer or the parent to make payments on a timely basis. On the other hand, in the case of ABCP, the ultimate borrowers are often anonymous to the investors and since an ABCP conduit is a legally separate SPV, ABCP investors do not have legal recourse against the sponsors of the vehicle but do have recourse to the underlying assets."

It asks, "What makes the CCP structure attractive to investors? Collateralized, yet cheaper: The access to collateral vs. unsecured CP could appeal to investors who prefer to have collateral backing their CP holdings. While the availability of investable paper is still an issue given the relatively small size of the market (we estimate the current size to be roughly $​25 billion), secondary liquidity is less of an issue for the typical buy-​and-​hold CP investor. If the CCP market remains confined to a smaller buyer base, sophisticated investors might
continue to be able to extract a significant yield premium."

Citi'​s Rai also tells us, "Money funds can overcome maturity restrictions: CCPs are typically backed by term repos which have been designated illiquid securities by the revised Rule 2a-​7. Thus, term repos do not meet maturity restrictions imposed on money funds to meet liquidity requirements and are now confined to less than 5% of a money market fund'​s holdings. The CCP structure allows funds to hold commercial paper which are backed by the same term repos but with much broader maturity restrictions. For instance, a CCP note can qualify for the weekly liquidity bucket if it matures within seven days regardless of the maturity terms of the underlying repo collateral. And, money funds remain starved for investable paper in the face of low yields and shrinking T-​bill issuance and thus welcome the supply of newer programs as they come to market."

He adds under, "What makes the CCP structure attractive to issuers? Potential for lower funding costs: Lower funding costs vs. unsecured CP and even term repo can seem improbable for now especially since ABCP, which is more mature product, continues to trade cheaper than unsecured CP. But, the potential for lower funding costs, which is a significant benefit to issuers of CP,
definitely exists as investors become more familiar with this product. Capital arbitrage: It is possible that the issuing subsidiary of the parent may receive more favorable capital treatment vs. the parent which allows for issuers to utilize more leverage."

Regarding "Potential obstacles in the growth of the CCP market," Rai writes, "​Potential Regulatory Hurdles: The regulatory landscape continues to change dramatically and reforms such as the Dodd Frank Act and the Basel III capital and liquidity requirements for banks could reshape the growth of this sector especially since the major issuers of CCP have only been large financial
institutions. Limited potential for scale: The CCP structure seems suitable for large
financial institutions which have legacy term repo positions to fund. This is a far cry from the scale and potential offered by the ABCP conduits which are invariably administered by banks which have a very large client base that requires financing and thus offers tremendous collateral, seller and issuer diversity. Thus, if regulatory pressures abate, the ABCP market could scale up
substantially as its remains strongly correlated to economic activity."

Finally, Citi says, "The CCP structure does offer some merits and the growth of this sector, even if limited, will offer welcome respite for investors in an asset scarce short term market."

Crane Data published its most recent monthly Money Fund Intelligence Family & Global Rankings yesterday, which rank the asset totals and market share of managers of money funds in the U.​S. and globally. (​It'​s available to our Money Fund Wisdom subscribers.) The latest reports show modest asset declines by the majority of major money fund complexes in January, but large gains over the past quarter and 12 months. SSgA, Morgan Stanley, JP Morgan, and Dreyfus showed some of the few gains in January, rising by $​5.​0 billion, $​3.​8 billion, $​2.​6 billion and $​2.​1 billion, respectively, while Goldman Sachs, BlackRock, Dreyfus, and Federated led the increases over the 3 months through Jan. 31, 2014, rising by $​11.​2B, $​10.​6B, $​9.​9B and $​7.​4B. Money fund assets overall rose by $​568 million in January, after rising by $​35.​6 billion in December, $​14.​7 billion in November and $​40.​5 billion in October (​according to our Money Fund Intelligence XLS). Note that our January figures were inflated by the addition of the PFM funds ($​6.​8 billion) and Alliance Bernstein funds ($​1.​5 billion); without these new funds, assets would have declined by $​7.​7 billion in Jan.

Our latest domestic U.​S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $​421.​8 billion, or 16.​1% of all assets (​down $​6.​4 billion in Jan., down $​6.​4B over 3 mos. and up $​5.​7B over 12 months), followed by JPMorgan'​s $​254.​4 billion, or 9.​7% (​up $​2.​6B, up $​2.​3B, and up $​3.​2B for 1-​month, 3-​months and 12-​months, respectively). Federated Investors ranks third with $​227.​9 billion, or 8.​7% of assets (​down $​1.​2B, up $​7.​4B, and down $​11.​5B), BlackRock ranks fourth with $​202.​0 billion, or 7.​7% of assets (​down $​6.​2B, up $​10.​6B, and $​44.​9B), and Vanguard ranks fifth with $​174.​7 billion, or 6.​7% (​down $​1.​0B, down $​711M, and up $​9.​3B). (​BlackRock'​s totals, and our overall totals, were inflated by the addition of $​48 billion in securities lending classes in October 2013.)

The sixth through tenth largest U.​S. managers include: Dreyfus ($​171.​3B, or 6.​5%), Schwab ($​165.​0B, 6.​3%), Goldman Sachs ($​142.​5B, or 5.​4%), Wells Fargo ($​118.​4B, or 4.​5%), and Morgan Stanley ($​100.​8B, or 3.​9%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA ($​84.​8B, or 3.​2%), Northern ($​75.​7B, or 2.​9%), Invesco ($​64.​8B, or 2.​5%), BofA ($​48.​6B, or 1.​9%), UBS ($​45.​1B, or 1.​7%), Western Asset ($​41.​8B, or 1.​6%), First American ($​37.​8B, or 1.​4%), DB Advisors ($​36.​4B, or 1.​4%), RBC ($​20.​9B, or 0.​8%), and Franklin ($​18.​4B, or 0.​7%). Crane Data currently tracks 75 managers, up two from last month and up one from last quarter.

When "​offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Island -- are included, the top 10 managers match the U.​S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 5, and Western Asset appearing on the list at No. 9. (​displacing Morgan Stanley from the Top 10). Looking at these largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore), we show these families: Fidelity ($​426.​9 billion), JPMorgan ($​378.​6 billion), BlackRock ($​299.​9 billion), Federated ($​237.​5 billion), and Goldman ($​208.​4 billion). Dreyfus ($​197.​1B), Vanguard ($​174.​7B), Schwab ($​165.​0B), Western ($​136.​5B), and Wells Fargo ($​119.​3B) round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals.

In other news, our February 2014 MFI and MFI XLS show net yields remained at record lows and gross yields inched higher in the month ended Jan. 31, 2014. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 841), remained at a record low of 0.​01% for both the 7-​Day and 30-​Day Yield (​annualized, net) averages. (​The Gross 7-​Day Yield was also unchanged at 0.​14%.) Our Crane 100 Money Fund Index shows an average yield (​7-​Day and 30-​Day) of 0.​02%, also a record low, and down from 0.​05% at the start of 2013. (​The Gross 7- and 30-​Day Yields for the Crane 100 dipped back to 0.​16%.) For the 12 month return through 1/​31/​14, our Crane MF Average returned a record low of 0.​02% and our Crane 100 returned 0.​03%.

The February issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers Friday. The latest edition of our flagship monthly newsletter features the articles: "Final SEC Regs Coming Soon, But Still Unclear If Combo," which predicts that Money Market Fund Reforms may arrive as early as late March; "Capital Advisors Group'​s Campbell & Pan Talk SMAs," which interviews the founder of and the director of research for a boutique cash and separate account manager; and, "Focus on Treasury: New FRNs & Debt Ceiling Redux," which reviews the Treasuries new floating rate securities and the latest debt ceiling debate. We also updated our Money Fund Wisdom database query system with Jan. 31, 2014, performance statistics and rankings, and sent out our MFI XLS spreadsheet Friday. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our January 31 Money Fund Portfolio Holdings data are scheduled to go out on Tuesday, Feb. 11.

The latest MFI newsletter'​s lead article comments, "While most money fund professionals expect the SEC'​s pending final Money Market Fund Reforms to arrive late in the second quarter or even Q3 of this year (​most also expect the "​combination" of floating NAV and emergency fees with gates), we think recent comments from SEC Chair Mary Jo White may mean it could get here as soon as the end of March. But recent comments from another Commissioner indicate that the choice of possible alternatives has likely not been finalized yet."

As we wrote in our Jan. 28 CraneData.​com News and quoted in MFI, SEC Chair White said recently on the pending reforms, "​We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely. Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014."

The "​profile" with Capital Advisors says, "This month, MFI interviews Capital Advisors Group'​s Ben Campbell, President & CEO, and Lance Pan, Director of Investment Research & Strategy. We discuss their business, and issues in the money markets, the separately managed account space, and the area just beyond money market funds. Our Q&​A follows."

Our interview asks, "MFI: How long has Capital Advisors been running cash?" Campbell answers, "We started in 1991 as an "​outsourced" investment management solution for treasurers. Our focus was then and is now managing separate accounts for institutional cash investors. As we'​ve gone through different credit and investment cycles, we'​ve seen the need for and developed credit and risk management products in response to inquiries from treasurers. We began by providing credit analysis of securities and portfolios, which although separate from our invest management business, drew upon our strong research and portfolio management capabilities." (​Watch for excerpts of this interview later this month, or write us to request the full article.)

The February MFI article on Treasury FRNs explains, "The U.​S. Treasury was a bigger focus than usual for the money markets this month as the agency launched its new floating rate securities and as another game of chicken over the debt ceiling looms. We don'​t know yet how much of the new FRN note was purchased by money funds, but we'​ll have our first glimpse from our Jan. 31 Money Fund Portfolio Holdings [​tomorrow and Wednesday]."

Crane Data'​s February MFI with Jan. 31, 2014 data shows total assets rising by $​561 million to $​2.​619 trillion (​1,​238 funds, five more than last month). Our broad Crane Money Fund Average7-​Day Yield and 30-​Day Yield remained at a record low 0.​01% while our Crane 100 Money Fund Index (​the 100 largest taxable funds) yielded 0.​02% (​7-​day and 30-​day). On a Gross Yield Basis (​before expenses were taken out), funds averaged 0.​14% (​Crane MFA) and 0.​16% (​Crane 100) on an annualized basis for both the 7-​day and 30-​day yield averages. (​So Charged Expenses averaged 0.​13% and 0.​14% for the two main taxable averages.) The average WAM and WAL for the Crane MFA and the Crane 100 were 45 and 47 days, respectively, up from 43 and 46 days last month. (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

Finally, on Friday we also released the Agenda and brochure for our main conference event, Crane'​s Money Fund Symposium, which will take place June 23-​25, 2014 <​b:>`​_ at the Renaissance Boston Waterfront Hotel. Our 6th annual Symposium should again attract the largest audience of money market professionals in the world. (​We'​re estimating almost 500 for our Boston show.) Registrations and sponsorships are now being accepted for our 2014 Symposium. Our second annual "​offshore" event, European Money Fund Symposium, is scheduled for Sept. 22-​23 in London (​watch for this agenda later this month), and our next "​basic training" Crane'​s Money Fund University, will take place Jan. 22-​23, 2015, in Stamford, Conn.

Yesterday, Mary Miller, Acting Deputy Secretary And Under Secretary Of The Treasury, gave Testimony Before The Senate Committee On Banking, Housing And Urban Affairs. Regarding topics of interest to money market funds, she comments, "Treasury and the Financial Stability Oversight Council also remain focused on emerging threats that might arise outside, or on the periphery of, the traditional banking sector. To that end, the Council is actively analyzing the extent to which there are potential threats to U.​S. financial stability arising from asset management companies or their activities, and whether such threats could be mitigated by Council designations or whether they would be better addressed through other regulatory measures." (Note: Watch for our February issue of Money Fund Intelligence and our MFI XLS spreadsheet with Jan. 31, 2014, performance data and averages later Friday morning.)

Miller'​s testimony continues, "As part of this analysis, the Council requested that the Office of Financial Research conduct a study of asset management activities to help determine whether these activities could create, transmit, or amplify stress through the financial system. The OFR released its study at the end of September following a careful analysis that included discussions with a number of market participants and input from Council member agencies with relevant expertise."

She explains, "The Council'​s focus on emerging risks outside the core banking system led it to issue, at the end of 2012, proposed recommendations for money market mutual fund (​MMF) reforms. Throughout this process, the Council has made it clear that the SEC is the primary regulator of MMFs and should take the lead in driving reform. Last June, the SEC proposed regulations intended to reduce the risks presented by MMFs, and we expect that the SEC will issue a final rule later this year that will address the vulnerabilities identified by the Council."

Miller comments, "​And finally, in considering risks to financial stability, we cannot ignore fiscal developments at home. Last year, Congress passed a temporary suspension of the debt limit, and that temporary suspension lasts only through February 7, which is tomorrow. After that, in the absence of Congressional action, Treasury will be forced to use extraordinary measures to continue to meet its obligations. We now forecast that we are likely to exhaust these measures by the end of this month. And even though this is an estimate, it is clear that extraordinary measures will not last for an extended period."

Finally, Miller adds, "It would be a mistake to wait until the 11th hour to get this done. The fact is, simply delaying action on the debt limit can cause harm to our economy, financial markets, and taxpayers. We are already seeing some volatility in Treasury bills that mature after February 7. Around the time of last year'​s delay, we saw consumer and business confidence drop, and investors and market participants publicly question whether it was too risky to hold certain types of U.​S. government debt. Such a question should be unthinkable. Given these realities, it is important that Congress move right away to increase our borrowing authority."

Authors Tony Carfang and Cathy Gregg explain, "​Treasury Strategies is a leading consulting firm in treasury and cash management for corporations and financial institutions. We regularly survey our clients about their financial practices and concerns. With this letter, we submit the results of our survey "​European Money Market Mutual Fund Survey on Regulation - February 2013". The findings are consistent over time with other surveys we have conducted in Europe and other regions of the world."

They tell us, "Our survey findings raise a serious concern that we bring to your attention: If proposed regulations restricting the operation of constant net asset value MMFs (​CNAV) are enacted, corporate treasurers will greatly reduce their investments in these funds and transfer their cash into already swollen deposits at commercial banks. This will lead to increased concentration and risk in the banking sector while also depriving investors of an important liquidity management tool."

The Treasury Strategies letter continues, "The MMF industry in Europe is a significant one, and includes both CNAV funds and variable net asset value (​VNAV) funds that fluctuate in value each day. Together these account for 25% of total corporate cash investments in Europe. For a variety of reasons, 61% of corporate treasurers in our survey invest company cash in CNAV funds only, while 30% use a combination of VNAV and CNAV funds. Proposed regulations will diminish the viability of the CNAV funds."

It adds, "In short: If CNAV funds were impaired by the proposed regulations, 69% of investors who invest only in CNAV funds would reduce or discontinue using MMFs. These investors represent 91% of the portfolio value reported in the survey. 72% of CNAV investors would substitute European bank deposits as an alternative to some of their investment in MMFs. 39% of CNAV investors would substitute bank deposits in other jurisdictions as an alternative to some of their investment in MMFs."

Finally, the letter writes, "The survey results further support the conclusions that MMFs have become a significant cash management tool for European institutions, that CNAV MMFs represent a large portion of MMF holdings by European institutions, and that changing European MMF regulations to require VNAV would significantly reduce investment in European MMFs. We are pleased to share this information as you debate these proposed regulations. We encourage you to carefully consider the ramifications of impairing CNAV MMF usefulness, and thus further increasing banking sector concentration."

The attached study'​s "Executive Summary" says, "Treasury Strategies ... is pleased to present the results of a recent survey we conducted to assess the potential impacts of changes to
calculating the net asset value (​NAV) of Money Market Mutual Funds (​MMFs) within Europe. We surveyed unique corporate, government, and institutional investors in November of 2012. The respondents are sophisticated investors (​corporate treasury executives) with nearly 60% representing organizations that have annual revenues exceeding E1 billion."

It adds, "Our survey results indicate that any attempt to eliminate the constant net asset value (​CNAV) methodology for pricing MMFs in Europe would generate a negative reaction among investors. A large segment of respondents surveyed indicated that if enacted, they would either decrease or discontinue their use of money market funds. Analyses by industry and by company size show that this sentiment is pervasive. There were no material differences by respondent sector.
In order to test whether the behavior and attitudes varied depending upon the region in which a company was domiciled, we compiled the results in two parts. Part I is comprised of all companies participating in the survey, irrespective of the country of domicile. Part II is comprised of only those companies domiciled in Europe."

It continues, "The FRBNY has been periodically conducting overnight reverse repurchase agreement (​RRP) exercises with market participants, including MMFs, to test how these operations might function as a policy tool for managing short-​term interest rates. This test accounted for 3.​7% of all MMF assets within Fitch'​s sample at end-​December. By comparison, the MMF'​s allocation to European banks declined by 3.​9% (​i.​e. expressed as a percentage of MMF assets) during December."

The release adds, "Fitch notes that it is unclear whether the FRBNY exercise might have crowded out some of the MMF allocations to European banks or whether the European reduction reflects a new equilibrium taking hold. Primarily as a result of the RRP exercise, MMF allocations to U.​S. Treasurys and agencies, including both security holdings and through repos backed by government securities, increased to 27.​1% of MMF assets from 22.​9% of assets. Eurozone allocations accounted for 16.​8% of MMF assets as of end-​December, a decline from 19.​1% of assets at end-​November, 2013."

Fitch'​s 4Q13 Dashboard explains, "A significantly reduced supply of traditional money market fund (​MMF)-​eligible securities at year-​end has pushed funds to allocate cash to alternative sources. As is typical at quarter- and year-​ends, banks seek to reduce reliance on short-​term funding and decrease issuance of money market securities. In response, some MMFs chose to leave portions of their assets un-​invested with their custodian banks, with few other alternatives. The dearth of investment options has also led to surging usage of the Federal Reserve'​s (​Fed) reverse repo program (​RRP). On the last day of 2013, 102 eligible counterparties lent the Fed $​197.​8 billion at a rate of 3 basis points. According to data from Crane Data, MMFs accounted for $​139.​2 billion of this amount, representing 7.​1% of government MMF assets, 6.​8% of Treasury funds, and 4.​7% of prime funds. This presents a stark contrast to the low average daily usage of the facility in November and October, of $​4.​6 billion and $​6.​0 billion, respectively."

It also says, "In recent months MMF sponsors have launched new cash management and liquidity products to prepare for possible market changes after proposed reforms are finalized later this year. The Securities and Exchange Commission (​SEC) in June 2013 released proposals to reform MMF regulations, with a wide range of potential outcomes. Anticipating that investors' needs may change, a number of asset managers have recently launched "​enhanced cash" and other short-​term bond funds. Compared to MMFs, which currently maintain stable net asset value (​NAV) pricing, short-​term bond funds have fluctuating NAVs. Their average maturity profiles are typically longer than those of MMFs', and credit quality investment guidelines can be less restrictive, but they may offer slightly higher yields than MMFs. For now, institutional MMF assets have remained largely stable as investors wait for the final SEC proposal before changing cash investment guidelines."

Finally, Fitch'​s European update tells us, "US dollar- and sterling-​denominated funds, in their search for yield, have increased their unsecured financial exposures. The move was at the expense of repurchase agreements and sovereigns or quasi-​sovereigns issuers. In contrast, euro funds have favoured some re-​allocation towards sovereigns, supranationals and agencies, and non-​financial corporates. Diversification towards Canadian banks and Singapore'​s Oversea-​Chinese Banking Corp increased markedly during 4Q13."

Federated Investors sent out its latest "Insights" e-​mail yesterday, which contained two links to money fund commentaries. The first, by Senior Portfolio Manager Susan Hill, is entitled, "Money Market Memo: Staring at the ceiling ... again," while the second, from MM CIO Deborah Cunningham, is entitled, "Month in Cash: Weather still freezing but economy thawing." Hill writes, "​We hope the recent show of bipartisan cooperation that allowed Congress to agree on a budget and avoid another government shutdown doesn'​t prove to be fleeting. But with another debt-​ceiling deadline rapidly approaching, and with politics being what they are -- particularly in this era of seemingly endless gamesmanship -- we feel it is appropriate to reiterate some thoughts on the issue in case Washington lawmakers are unable to resolve the matter as quickly as anticipated."

She explains, "To be clear, we continue to believe the United States will not default on its financial obligations -- ever. The debt ceiling that was suspended last October as part of the deal struck to end the government shutdown and fiscal showdown is set to be reinstated Feb. 7. However, the U.​S. Treasury is expected to have approximately $​30 billion in cash on hand at the time as well as about $​200 billion of "​extraordinary measures" at its disposal to continue to meet the financial obligations of the federal government at least through the month."

Hill tells us, "Treasury Secretary Jack Lew is being a little coy about the actual drop-​dead date, but projections from most analysts suggest the Treasury won'​t actually run out of money if nothing is done until well into March. While we anticipate this latest debt ceiling go-​round will be resolved without the heightened drama of last October, we would not be surprised if tensions began to build in the upcoming weeks. Contingency planning has become a necessary part of all of our lives in the aftermath of the global financial crisis, and as such we understand the need for shareholders to contemplate what the world might look like in the event of a technical default, and how money market funds could be affected".

She continues, "​Of note: First, Securities and Exchange Commission Rule 2a-​7, which governs money market funds, does not require that a fund dispose of a security that is in default. Rather, it permits the fund to continue to hold such a security, provided the board of directors of the fund has determined that disposal of the security would not be in the best interests of the fund. Rule 2a-​7 indicates such determination may take into account, among other factors, market conditions that could affect the orderly disposition of the security. Given the expectation that any potential technical default on U.​S. Treasury securities would be very short-​lived, it is possible a fund'​s board could make the determination to continue to hold the security. It is also reasonable to assume that such a holding could be valued taking into consideration the expectation of being paid in full once the dust settles. Second, although all short-​term securities might exhibit some degree of volatility during this uncertain but likely very short technical default time frame, we would expect the market reaction to remain substantially below the threshold at which significant downward pressure would be exerted on the net asset values (​NAVs) of money market funds."

Hill adds, "Finally, there has been anecdotal evidence of some selling of Treasury securities with maturities around the time frame when the extraordinary measures are expected to run out. Although we remain steadfast in our belief that Congress will not allow a default, we are less confident in the actions of other investors in the front end of the market. As a result, we have avoided reinvestment of maturing securities in the March time frame and currently have no exposure to that area in any of our money market portfolios."

Finally, she says, "Federated'​s money market funds are absolutely committed to maintaining liquidity to meet the needs of their shareholders in the event that an increase in the debt ceiling is delayed. Rule 2a-​7 already requires money market funds to maintain stringent minimum liquidity buffers for daily and weekly liquidity needs. As we have done heading into similar periods in the past, Federated would expect to continuously evaluate the potential liquidity needs of its money market funds and augment their existing liquidity position with greater daily or weekly positions, cash balances or alternate liquidity sources should it appear necessary if the conflict continues. In spite of -- if not because of -- the dysfunction in Washington, we want to reassure our shareholders that we have their best interests at heart with respect to safety and liquidity at all times."

Federated'​s Cunningham comments, "A frigid January kept the money markets on ice, despite some mixed signals from the U.​S. and world economies. The Federal Reserve'​s decision to continue with tapering did not have a pronounced effect, as the commercial paper and cash markets held up well. Supply was pretty good without any hiccups, and the yield curve ended the month basically where it was at the end of December. We did see a flight to quality toward the end of the month on troubles in emerging-​market countries as well as the Fed'​s decision to reduce monthly asset purchases, known as quantitative easing (​QE), another $​10 billion to $​65 billion, split between mortgage-​backed securities and Treasury securities."

She adds, "​While this risk-​off trade impacted the equity and bond market in the month'​s final week, from a money-​market perspective, the Fed'​s decision to extend the experimental overnight reverse repo facility was more important and a positive. The Fed is testing the facility to help manage its an exit from extraordinary monetary accommodation of the past several years, and both our funds -- which have utilized the facility to the tune of a couple billion dollars daily -- and the broader market have benefitted. At the end of the December and into most of January, there would have been zero to potentially negative rates offered for some forms of repo had the Fed, through the facility, not improved supply and essentially set a floor on overnight rates. Supply and demand remains out of whack and continues to keep rates low, which is a key reason we welcome the Fed'​s extension of the program."

Given the Treasury'​s introduction of their new 2-​year floating rate notes last week, we wanted to excerpt some more commentary on these new securities. (​Watch for our next Money Fund Portfolio Holdings dataset early next week, which will contain the first glimpse of live MMF FRN holdings as of Jan. 31.) Below, we quote from Wells Fargo'​s special report, "The 2-​Year Treasury FRN," and from J.​P. Morgan Securities' most recent commentary. Wells' Garret Sloan wrote last Wednesday, "The first FRN auctions today, Wednesday, January 29th and will settle on Friday, January 31. The Treasury expects to issue FRNs on a quarterly basis with monthly reopenings occurring between the quarterly auctions. The quarterly auctions will settle on the last calendar day of the month, or the first business day after, and the reopenings will settle on the last Friday of the month, or the first business day after. The size of the first auction is $​15 billion, and the size of each auction and reopening is expected to be in the $​10-​15 billion range, putting total FRN issuance in the $​120-​180 billion range for 2014. Bill issuance as a percentage of total marketable debt has steadily declined over the last 5 years and is expected to continue to do so as the growth of the FRN program will likely be at the expense of the bills market."

Wells explains, "FRNs will reset daily and the interest calculation is based upon a reference rate plus a spread. The reference rate is the High Rate from the most recent 13-​week T-​bill auction which typically occurs every Monday, or the next business day if it falls on a holiday. However, FRNs will have a two-​day lock-​out period prior to the auction settlement date or interest payment date. So if the most recent 13-​week bill auction falls during that lock-​out period, the
High Rate from the previous week'​s auction is used as the reference rate. FRNs are technically a daily reset security, but effectively the rate will only change once a week since the 13-​week bill auction occurs once a week."

They add, "We believe that a daily reset was chosen to reduce the impact of the 2-​year FRNs on money market fund portfolio weighted average maturity calculations, which must be less than 60 days. While the FRNs will still be considered 2-​year securities for the money market funds' weighted average life calculations, on balance we believe that the 2-​year Treasury FRNs could actually be favored by money funds as a source of liquidity vs. T-​bills, especially if they trade at favorable spreads."

J.​P. Morgan Securities' latest weekly "​Short-​Term Fixed Income" tells us, "This past Wednesday, Treasury auctioned its inaugural 2y floating rate note (​FRN) to strong demand. The new issue priced at a spread of 4.​5bp over 3m bills, slightly through our initial expectation of +​5bp. The bid-​to-​cover ratio, commonly used as indicator of Treasury demand, was 5.​67 which is high compared to any other Treasury auction.... Not surprisingly, investor participation on this new issue was relatively broad based. Anecdotally, we had heard that some short duration mutual funds, separately managed accounts and insurance funds came in for the auction. Many of these investors have a common trait, which is that they are benchmarked to bills, thus motivating them to subscribe to the auction as long as there'​s a positive spread. This group of investors manages liquidity pools right outside of the 2a-​7 space (​i.​e., slightly longer duration), so this product is seemingly a natural fit for them."

JPM'​s update, written by Alex Roever, Teresa Ho and Chong Sin, continues, "Notably, money fund participation appears relatively light, contrary to our initial expectations. While some funds participated in light of the decline in money market supply, others did not. Generally, this latter group of accounts found the floaters too expensive and was not compelled to invest at this time. Since Treasury intends to issue FRNs each month, either in re-​openings or new issue, some investors felt there was no urgency to invest and instead took this opportunity to see how secondary market liquidity develops for the product. Furthermore, concerns around the debt ceiling might have contributed to their absence."

Finally, they add, "Looking ahead, though we'​re confident that there will be enough investor support for Treasury FRNs, it'​s unclear how investor demand for this product will exactly evolve. The mix of investors and their participation rate will likely change over time. For example, while money funds are likely a receptive investor base for Treasury FRNs, their demand may be limited by the different types of funds and the various government and rating agency rules that govern what they can buy. In particular, both Rule 2a-​7 and most rating agency rules place a weighted average life (​WAL) restriction that limits the portfolio'​s average time to final maturity to 120 day."